The Icarus-style downfall of leading fund manager Neil Woodford has prompted many uncomfortable questions.
Investors are unlikely to understand the intricacies of the unit trust structure and why Woodford’s funds have been forced to close, but they might have expected expert fund investors to have understood the risks. This brings into question the role of intermediaries and, in particular, the role of so-called ‘best buy’ lists: recommended fund lists from brokers and fund ratings groups.
As it stands, it is difficult to know how many groups held Woodford on their buy lists because they have removed them quickly as controversy about the former star has grown.
However, we do know that the fund was held on the Hargreaves Lansdown Wealth 50 list until its suspension last week and that Morningstar only downgraded the fund to ‘negative’ on 5 June, the day of its suspension. Major IFA groups such as St James’s Place and Openwork had large mandates with Woodford. Were they asleep on the job?
Some fund research groups believe the problems with Woodford’s funds were clear and should have been spotted by any fund analyst worth their salt.
Jim Wood-Smith, CIO private clients at Hawksmoor Investment Management, said: “We did not hold the fund. Nor have we ever been tempted. Any reasonable examination of the portfolio would tell you that it was high risk growth, not equity income. It was not in any shape or form a steady provider of equity income to the middle class savers of the country….The larger (issue), for me, is how and why these nationally famous institutions have been able to channel so much money into such painfully poorly performing and risky investments. The investors in the funds deserve to know.”
Does this discredit ‘best buy lists? These have been a useful way to navigate investments for those with little knowledge of the best options. The idea that experienced fund researchers could have made such a huge mistake is troubling. Woodford undoubtedly had a strong previous record, but had seen difficulties for some time. If these lists can’t be trusted to alert investors when things go wrong, are they worth using?
Another problem is the apparently murky relationship between best buy lists and the platform fee. While no-one is suggesting that Hargreaves Lansdown put the Woodford fund on its Wealth 50 because of fees, Woodford had to conform to its fee structure to get on the list. This has seen top-performing funds such as Terry Smith’s FundSmith fund left off. Hargreaves argues that it is securing better prices for clients, but there is also an argument about who gets a greater share of the fee from the client – should it be the platform or the investment manager? Both believe theirs is the greater claim. More important for investors, however, is that the best buy list decision is not being made on talent and skill alone.
There is also the issue of investment trusts. For Hargreaves, its Wealth 50 is so popular with clients that the list features investment trusts because there isn’t enough liquidity in investment trusts to accommodate the wall of money that would come its way.
Investment trusts have generally been found to perform better than their open-ended equivalents and avoid many of the problems seen with the Woodford funds – the Patient Capital investment trust may have fallen a long way, but investors can still get their money out and its closed-ended structure means Woodford isn’t being forced into a fire-sale of assets in the trust. Again, the lists are – of necessity – not completely impartial.
Having said all that, not all best buy lists work that way. Plenty didn’t include Woodford and are a good simple way for novice investors to pick funds. The trouble is that if investors have to dig down into how best buy lists are constructed in order to check whether they are impartial or not, their use as a handy tool to save investors work and complexity is diminished. The FCA has said it is looking closely at how they are used – this is welcome. Investors need to be able to trust all of them, or they are no use at all.